1Before the

FEDERAL COMMUNICATIONS COMMISSION

The United States Department of Justice (“Department”)1 submits this ex parte filing to

respond to suggestions by some companies and individuals that the Federal Communications

Commission (“FCC” or “Commission”) adopt new regulations governing the transmission of

traffic over the Internet—so-called “net neutrality” rules. The FCC should be highly skeptical of

calls to substitute special economic regulation of the Internet for free and open competition

enforced by the antitrust laws. Marketplace restrictions proposed by some proponents of “net

neutrality” could in fact prevent, rather than promote, optimal investment and innovation in the

Internet, with significant negative effects for the economy and consumers.

1 Through its antitrust enforcement and competition advocacy efforts, the Department hassubstantial expertise in assessing competition and the effect of regulation with respect to theInternet and “net neutrality”-related issues. The Department has undertaken extensiveexamination of issues relating to Internet access and delivery services in connection with itsinvestigations of the AT&T/Bell South, SBC/AT&T, Verizon/MCI, MCI/WorldCom/Sprint, andAT&T/MediaOne mergers. In AT&T/BellSouth, for example, the Department “investigatedwhether the merger would create competitive problems in Internet services, including ‘netneutrality’ concerns regarding the merged firm’s ability or incentive to favor its own Internetcontent over that of its rivals.” Press Release, U.S. Dep’t of Justice, Statement by AssistantAttorney General Thomas O. Barnett Regarding the Closing of the Investigation of AT&T’sAcquisition of BellSouth at 3 (Oct. 11, 2006), available athttp://www.usdoj.gov/atr/public/press_releases/2006/218904.pdf. The public policy objective here is clear: a thriving and dynamic Internet capable of

meeting the demands of consumers for fast and reliable access to a rich variety of content and

applications. Many commenters in this proceeding agree that the best way to achieve this

objective is through marketplace competition. Other commenters, however, have urged the FCC

to consider imposing prophylactic “neutrality” regulations to prohibit what they regard to be

undesirable differentiation in the provision of Internet services. Some of these proposals, for

example, could restrict broadband providers from offering different levels of quality of service at

varying costs to content and application providers in a manner that efficiently responds to market

demands. Other proposals would require interconnection, open access, and structural separation

of companies offering both Internet access services or transmission and content or applications

deliverable over the Internet.2

The Department submits, however, that free market competition, unfettered by

unnecessary governmental regulatory restraints, is the best way to foster innovation and

development of the Internet. Free market competition drives scarce resources to their fullest and

most efficient use, spurring businesses to invest in and sell as efficiently as possible the kinds

and quality of goods and services that consumers desire. Past experience has demonstrated that,

absent actual market failure, the operation of a free market is a far superior alternative to

2marketplace restrictions proposed in the name of “neutrality” would do just that with respect to

the Internet. Congress passed the Telecommunications Act of 1996 to “promote competition and

reduce regulation,” and to “encourage the rapid deployment of new telecommunications

technologies.”3 In response, the Commission has deregulated various aspects of broadband

services.4 Against this background, commenters proposing special regulation of the Internet

should bear a substantial burden of demonstrating that it is appropriate.

Based on the record in this proceeding to date, proponents of “net neutrality” regulation

have failed to show that a sufficient case exists for imposing the sorts of broad marketplace

restrictions that have been proposed. Moreover, the Department has grave concerns about the

potential negative consequences of such restrictions were they to be enacted. Given the dynamic

and evolving nature of the Internet, the Department finds that there are especially strong reasons

to be cautious about imposing restrictive regulations in this context.

• In response to the FCC’s request, commenters provided scant evidence that

consumers are being harmed by the business practices of Internet industry participants. To the contrary, Internet usage is soaring. Consumers are reaping substantial benefits from new services and technologies.

• The types of conduct that some proponents of regulation seek to prohibit—e.g., the prioritization of certain content and content providers (such as streaming video and other latency-sensitive content), offering of premium services and different levels of quality of service, preferential treatment of certain content, and vertical integration— in many instances actually may be procompetitive. A blanket prohibition on such conduct would likely result in significant marketplace distortion. Even assuming that a potential danger exists, the ambiguity of what conduct needs to be prohibited raises

3 a real possibility that regulation would prohibit some conduct that is beneficial, while failing to stop other conduct that may be harmful.

• A number of proposed “neutrality” restrictions have the potential to harm consumers.

For example:

• Precluding broadband providers from charging fees for priority service could shift the entire burden of implementing costly network expansions and improvements onto consumers. Because the average consumer may be unwilling or unable to pay significantly more for access to the Internet in order to ensure smooth delivery to consumers demanding bandwidth-intensive and latency-sensitive content, critical network expansion and improvement may be significantly reduced or delayed.

• Mandating a single, uniform level of service for all content could limit the quality and variety of services that are available to consumers and discourage investment in new facilities. Services that are particularly vulnerable to delays in delivery or other network problems may either not be offered or will be offered at a lower level of quality than a competitive marketplace would have provided. In addition, the resulting one-size-fits-all uniform level of service may deprive consumers of the choice to pay for the quality they want—leaving some unhappy with the low quality and others unhappy with the high price.

to manage their networks efficiently. There are benefits to treating certain content differently. A number of companies offer services to provide faster delivery of content and/or to avoid some of the congestion and delay on the public Internet. Owners of network facilities have legitimate reasons to manage their facilities in ways that lessen congestion and address public safety issues.

The Department urges the Commission to weigh carefully the potential negative

implications of regulation as it considers requests to initiate a rulemaking. Regulatory restraints

in this dynamic and evolving sector of the economy could perversely stifle innovation and

broader array of choices that meets service preferences more effectively and efficiently. Further,

such practices can enable greater investment that will speed innovation and development.

On the empirical side, despite the Commission’s request for evidence of harmful

discrimination or behavior, as discussed further below, commenters failed to present evidence

suggesting that a problem exists. To the contrary, it appears that the Internet is flourishing

without the proposed sectoral regulation. Statistics evidence an explosion in Internet usage in

recent years due to new applications and increased broadband subscribership. According to press

accounts, in June 2006 alone 2.5 billion videos were watched on YouTube;6 by May 2007,

“hundreds of millions” of videos were being downloaded every day.7 Consumers increasingly

are utilizing the Internet for everything from shopping, to news and information. E-commerce

5 As reported by the Antitrust Modernization Commission, for example, “[n]umerousstudies of sectoral deregulation in the United States show that the unleashing of market forceshas greatly increased efficiency and provided substantial benefits to consumer welfare.”Antitrust Modernization Comm’n, Report and Recommendations 334 & nn.9, 10 (Apr. 2007),available at http://www.amc.gov/report_recommendation/amc_final_report.pdf. 6 YouTube Serves Up 100 Million Videos a Day Online, USA TODAY, July 16, 2006,available at http://www.usatoday.com/tech/news/2006-07-16-youtube-views_x.htm?.

5accounted for sales of $31 billion in the first quarter of 2007, an 18 percent increase from the

first quarter of 2006.8 Internet advertising produced $16.9 billion in revenues in 2006, a 35

percent increase from 2005.9

The number of Internet subscribers also continues to grow, with reports indicating that

there were approximately 65 million new broadband subscribers worldwide from June 2006 to

May 2007.10 In 2000, there were 420 million online users worldwide, a number that increased to

1 billion in 2005 and is expected to double by 2010.11 In the United States, the FCC found that

high-speed (or broadband) lines increased by 26 percent during the first half of 2006, from 51.2

million to 64.6 million lines in service. Between June 2005 and June 2006, the Commission

found that high-speed lines increased by 52 percent (or 22.2 million lines).12

The increased usage and popularity of new services that are sensitive to delays in delivery

(known as latency-sensitive traffic) has increased demand for bandwidth.13 In response,

neutrality” do not allege that such services need to be prohibited.19 In addition to these caching

services, the Department believes that there can be significant benefits in allowing broadband

providers to manage their networks and differentiate among some traffic on the Internet.20

17 Packets of traffic on the public Internet are processed on a “best efforts” basis, whichdoes not provide any guarantees regarding speed, delivery, service quality, or priority treatmentwhen the network is congested. When routers have more packets to process than capacity to doso, the overflow packets are queued up for processing in the order they arrive, up to the router’sphysical capacity. Any additional packets beyond the router’s capacity are lost. 18 One of the largest content distribution networks, Akamai, reports that its services“reduce the impact of traffic congestion, bandwidth constraints and capacity limitations” by“accelerating and improving the delivery of content and applications over the Internet.” Akamai,2006 Annual Report 1, 2 (2006), available athttp://www.akamai.com/dl/investors/akamai_annual_2006.pdf. According to Akamai, its serversalone deliver 10-20 percent of all web traffic. Akamai, Facts & Figures 2, available athttp://www.akamai.com/html/about/facts_figures.html (last visited on July 16, 2007). Anotherway in which a business service can obtain prioritized, more secure and reliable service isthrough a virtual private network. 19 See, e.g., Comments of Google at 4 n.6. 20 Broadband providers also need the ability to prioritize Internet traffic in order to (1)serve public safety officials better during emergencies, and (2) ensure the security of theirnetworks.

8II. THE CASE FOR REGULATING THE INTERNET HAS NOT BEEN MADE, AND REGULATORY RESTRAINTS CAN STIFLE INVESTMENT AND INNOVATION TO THE DETRIMENT OF THE ECONOMY AND CONSUMERS

Commenters failed to submit evidence in response to the Commission’s request for

evidence of harmful discrimination or other behavior suggesting the existence of a systematic or

examines the relationships among consumers, broadband providers, and content providers, and

suggests that “net neutrality” regulation that requires broadband providers to offer the same

quality of service to everyone may be inefficient and reduce overall welfare.24 Other studies

have identified similar effects and have attempted to quantify the effect of proposed

regulations.25

Other “net neutrality” proposals could prohibit broadband providers from offering

differentiated quality of service. Such a rule, however, would eliminate choice and could deter

the use and development of new, latency-sensitive applications that require more reliable

delivery. A study by Robert Litan and Hal Singer concludes that without reliable low-latency

packet delivery, applications that demand a high quality of service, such as telemedicine, may

24 See Benjamin E. Hermalin & Michael L. Katz, The Economics of Product-LineRestrictions With an Application to the Network Neutrality Debate 28 (AEI-Brookings JointCenter for Regulatory Studies, Working Paper 07-02, 2007), available at http://www.aei-brookings.com/admin/authorpdfs/page.php?id=1362&PHPSESSID=5db67c5b521ccdddb517c3dbe68ed2bb. 25 For example, Steven Pociask estimates that, if consumers bear the entire cost ofnetwork upgrades through increases in broadband Internet access, this type of “net neutrality”regulation will cause consumer surplus to fall $9.3 billion annually. See Steven B. Pociask, NetNeutrality and the Effects on Consumers 24 (American Consumer Institute 2007), available athttp://www.theamericanconsumer.org/ACI%20NN%20Final.pdf. Although the study’sapproach depends on a number of key assumptions comparing market dynamics absent “netneutrality” regulation (e.g., that the entire cost of network upgrades are borne bycontent/application providers, which causes consumer prices for Internet access to fall anddemand to increase) with market dynamics with “net neutrality” regulation (e.g., that consumersbear the entire cost of network upgrades, which causes consumer prices for Internet access toincrease, and demand to fall), the magnitude of the estimated loss in consumer surplus suggests“net neutrality” regulation may not be in consumers’ interests.

broadband over power lines, and satellite providers.

26 See Robert E. Litan & Hal J. Singer, Unintended Consequences of Net NeutralityRegulation, J. Telecomm. & High Tech. L. (forthcoming 2007), available athttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=942043 (“Litan and Singer Study”). Thisfinding is consistent with comments submitted by users and providers of telemedicine, who fearthat regulations that prevent prioritization of packets could “threaten continued advances intelemedicine.” See Comments of Provideaat 2, Broadband Industry Practices NOI (filed June15, 2007). Providea is “a video communications and network integrator that supports health careand ‘telemedicine’ applications across the nation.” Id. at 1; see also Comments of theAssociation of Washington Public Hospital Districts at 1-2, Broadband Industry Practices NOI(filed June 15, 2007) (urging against the enactment of “regulations that would stifle investment,innovation and network intelligence” because such action would harm telemedicine). 27 Litan and Singer Study at 26.

12III. CONCLUSION

For the foregoing reasons, the Department urges the Commission to exercise caution

before initiating a notice of proposed rulemaking and adopting rules that would regulate this